Should FireEye Inc. Be Worried About Palo Alto Networks?

Cyber security is big business -- and it's expected to get even bigger. Research company Markets and Markets expects the demand for cyber security products to swell to around $156 billion in 2019, up from about $95 billion last year.

That growing demand represents an opportunity for FireEye , whose security services are designed to thwart advanced attacks. But FireEye faces intense competition in the space. In particular, rival Palo Alto Networks' WildFire poses a competitive threat. Should FireEye and its shareholders be concerned?

Zero-day attacks and advanced threatsTraditional, legacy security products, such as antivirus software, rely on a form of signature-based threat detection. Threats are discovered and added to a continuously updated database. Software running on a machine or across a network is scanned and compared to this database, and software that matches a known threat in the database is flagged, quarantined, or deleted.

It's a highly effective form of cyber security when it comes to tackling known threats, but it can't account for malware that exists outside the database.

FireEye's services attempt to solve this problem. Using a network of virtual machines, FireEye continuously tests the behavior of potentially malicious software, looking for evidence of bad behavior. This allows FireEye to take on zero-day attacks (malware that relies on previously unknown exploits) and advanced threats (targeted attacks on particular organizations).

FireEye's business, then, really exists in a class of its own, outside the purview of more traditional security offerings. FireEye is leading the charge in the creation of a brand-new market for security products -- and it's having some success. Last year, FireEye's revenue soared 163%, and management believes it will rise more than 40% this year. This stands in contrast to more traditional security compnies, such as Symantec, which have stable businesses but are seeing little growth.

Palo Alto's WildFireBut FireEye isn't alone in offering such services. Palo Alto Network's WildFire is quite comparable to FireEye's offerings.

WildFire is a subscription-based service that Palo Alto Networks offers its customers. Like FireEye's Threat Prevention Platform, WildFire runs malware in a secure, cloud-based environment, studying it for evidence of unseemly activity.

WildFire isn't Palo Alto Network's primary offering, but it is seeing significant uptake among its customer base. Last quarter, Palo Alto Networks reported that it had over 5,000 customers on WildFire subscriptions, up from 4,000 in the previous quarter -- a 25% gain sequentially.

During its most recent earnings call, Palo Alto Networks' CEO, Mark McLaughlin, identified FireEye as being WildFire's chief competitor. McLaughlin argued that WildFire was winning against FireEye, and was poised to continue to win in the quarters to come.

Palo Alto Networks' biggest advantage may come from its ability to offer customers a larger bundle of services. Someone already using Palo Alto Networks' firewall can supplement it with a subscription to WildFire, rather than contracting with FireEye separately.

FireEye remains intriguingBut for customers who don't use Palo Alto Networks' other products, FireEye may still be compelling. And FireEye has other advantages: Last year's purchase of Mandiant allows it to pair its technology with forensic services to track threats and hacks back to their source.

With its rapid growth, it's clear that competition isn't much of a headache for FireEye -- at least not yet. But it's definitely worth watching in the quarters to come. Both FireEye and Palo Alto Networks are innovative, speculative, and profit-lesscompanies experiencing hyper-growth. Investors looking to add cybersecurity exposure to their portfolio may consider making small investments in both, rather than placing a big bet on either in particular.

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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends FireEye and Palo Alto Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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